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When To Use Quicken For Mutual Fund Recordkeeping
By: Stephen Nelson
While you might assume any mutual fund investor should use Quicken’s mutual fund
record-keeping tools, that isn’t the case. Because investment record keeping,
including mutual fund record keeping, requires significant work and involves
complexity, you need to make sure the effort is worth it.
In general, you keep investment records for any of the following reasons:
Reason 1: You want to track interest and dividend income.
Reason 2: You want to track realized and unrealized capital gains and losses.
Reason 3: You want to measure or grade the profitability of an investment by
calculating its annual return or yield.
Obviously, all three of the tasks in the preceding list sound worthwhile, but
many investors won’t need to use Quicken’s record-keeping tools to get this sort
of information.
Tracking Investment Income
If your investing is done using tax-deferred accounts, such as individual
retirement accounts, 401(k)s, and other similar investment containers, you don’t
need to track the investment’s income. The income from tax-deferred investments
stored is not currently taxable. The money you contribute to one of these
tax-deferred accounts can be counted as a deduction when the money is
transferred into the account. Any money you ultimately withdraw from one of
these accounts can be counted as income when you move money out of the account
and into your regular checking account.
For example, if you contribute money to an individual retirement account by
writing a check on your regular bank account, you can categorize the check as
“IRA contribution” when you write the check. This categorization lets you easily
track the IRA contribution deduction you will need to report on your tax return.
Similarly, if you withdraw money from an IRA account, all you need to do is
categorize the deposit as IRA income. This lets you keep track of the IRA
withdrawals you will also need to report on your tax return.
Tracking Capital Gains
As mentioned earlier, realized and unrealized capital gains are often the second
reason for using Quicken for investment record keeping. In the case of a regular
taxable investment account, any time you buy and then later sell an investment,
you experience a capital gain or loss that needs to be reported on your tax
return. Because capital gains and losses are important for your tax return, when
you keep records of taxable investments you want to track these items. You even
want to track potential, or unrealized, capital gains and losses.
However, while tracking unrealized and realized capital gains and losses is
important for taxable investment accounts, you don’t need to do this for
tax-deferred investment accounts like individual retirement accounts and 401(k)
accounts. The reason is simple. For tax-deferred investment accounts, gains and
losses aren’t taxable. Just as is the case with investment income, inside a
tax-deferred investment account, gains and losses have no effect on taxable
income. Again, the only tax effect comes from money you move into and out of the
account.
In general, money you move into the account is a deduction for purposes of
calculating your taxable income. Money you move out of your account is an income
amount for purposes of calculating your income tax return.
The general rule described in the preceding paragraph—that money moved into and
out of a tax-deferred investment account is what produces a tax deduction or
taxable income amount—is true. However, predictably, some tax-deferred
investment accounts don’t work this way. There are, for example, nondeductible
IRA and Roth IRA accounts.
A nondeductible IRA account doesn’t give the taxpayer a deduction merely for
moving money into the account. Also, a Roth IRA account doesn’t actually produce
any taxable income just because you move money out of the account.
The primary benefit of a Roth IRA is that you get to withdraw money from the IRA
without including the withdrawal on your tax return. However, in spite of the
fact that money moved into certain types of IRAs or out of certain types of IRAs
doesn’t trigger a tax deduction or taxable income, the general rules described
here still apply. Even for nondeductible IRAs or Roth IRAs, you don’t need to
track investment income, dividend income, capital gains, and capital losses for
tax record-keeping using Quicken.
Measuring Investment Performance
As identified earlier, the third reason for investment record keeping concerns
investment performance measurement. In general, one of the things you want to do
when you become serious about your investing is calculate how good or how bad an
investment performs. Complete and accurate investment records force you to
honestly evaluate your investing.
One of the ways you measure investment performance is by calculating the annual
return, or yield, produced by the investment. For example, if you buy a stock
for $12 a share and later sell it for $18 a share, you should calculate the
annual return on the stock.
An annual return, or yield, resembles an interest rate. By comparing the return
a stock earns to the return provided by other investments, you gain a frame of
reference and get a better idea of whether a particular investment makes sense.
While calculating returns obviously makes sense, note that one of the tasks your
mutual funds management company does is calculate annual returns. Therefore, you
don’t need to duplicate this effort. In effect, one of the services you are
already paying the mutual funds management company for is the calculation of
this important performance measure.
Mutual fund management companies calculate returns on an annual basis—typically
using the calendar year as the period for which returns are calculated. Your
investment holding period may not match the period for which the return was
calculated. For example, if you hold an investment for one year but your year
runs from July 1 to June 30, a return measure provided by the mutual fund
company may not be useful if the return is from January 1 to December 31.
Nevertheless, if you use the prudent mutual fund investment strategy—which is
simply to invest for longer periods, to buy and then hold—the mutual fund
management company’s performance measurements do give you the information you
need.
About the Author:
Seattle certified public accountant & author Stephen L. Nelson wrote Quicken for
Dummies and more than 100 other books as well. Nelson holds an MBA in Finance
and an MS in taxation. His web site is http://www.stephenlnelson.com |
